Question

What is a limitation of the Internal Rate of Return (IRR) when comparing two or more projects to select the best one?

a.

IRR cannot be used when cash flows are not conventional

b.

IRR fails to consider the time value of money

c.

IRR assumes reinvestment at the same rate as the project

d.

IRR leads to multiple rates of return

Posted under IC 89 Management Accounting

Answer: (c).IRR assumes reinvestment at the same rate as the project Explanation:The limitation of IRR when comparing two or more projects to select the best one is that IRR assumes interim positive cash flows are reinvested at the rate as that of the project that generated them.

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Q. What is a limitation of the Internal Rate of Return (IRR) when comparing two or more projects to select the best one?
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